September 2013 - Parks & Recreation - 25

vened to develop a comprehensive
deficit-reduction plan. A surprising
recommendation put forth in the
commission's final report was for the
federal government to begin fully taxing interest earned on newly issued
municipal bonds. While the Simpson-Bowles report as a whole failed
to gain Congressional support, the
idea of using the municipal bond interest exemption as a means of raising revenue gained traction with the
administration, and the president's
FY 2013 and 2014 budgets proposed
limiting the interest exemption to 28
percent of the interest earned for new
as well as existing bonds.
Risk Associated with Eliminating or
Capping the Interest Exemption
The tax exemption on municipal-bond
interest helps states and municipalities
raise needed capital for infrastructure
projects by incentivizing investors to
buy municipal bonds. Because these
are government securities, the interest earned generally pales in comparison to the interest an investor could
earn on other securities, but investors
are incentivized to put their money in
these securities through the federal tax
exemption. As a study conducted by
the National Association of Counties
reveals, investors have been strongly
motivated by the tax exemption, investing $378.9 billion in bonds issued
by state and local governments in 2012
alone (www.naco.org/research/Doc
uments/NACo-Research_Policy_Mu
niBonds_2013.pdf).
Municipal bonds are the primary
means of financing used by state and
local governments to fund infrastructure projects. Interest paid to investors
is less than the interest the local government would pay using other modes
of financing. According to the National League of Cities, local governments

save an average of 25 to 30 percent by
using tax-exempt municipal bonds versus taxable bonds (www.nlc.org/Documents/Influence%20Federal%20
Policy/Advocacy/talking-points-mu
nicipal-bond-interest-dec2012.pdf).

This, in turn, allows state and local
governments to invest more of the financed dollars into project infrastructure. Because municipal bonds are a
low-cost financing option, they are
generally well-received by voters, who

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Parks & Recreation

September 2013 - Parks & Recreation

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